Beijing's Relaxation In Zero-COVID Policy To Threaten Economy In 2023

The end of China’s “zero-COVID” policy will likely have a mixed effect on packaged food sales, but will ultimately have a net-positive effect, according to Chim Lee.

Beijing's Relaxation In Zero-COVID Policy To Threaten Economy In 2023

The total retail value of grain, oil, and food products produced in China was CNY903.2 billion (US$130 billion), up 9.9% year over year in the first half of 2022, according to data from the National Bureau of Statistics of China. However, this was prior to the outbreak of nationwide protests and Beijing’s relaxation of its strict zero-COVID policy, which resulted in an increase in infections that will threaten the Chinese economy in the upcoming year.

The removal of restrictions, according to some industry observers, will strengthen China’s economy, but an increase in infections could have an impact on consumer demand and the supply chain.

The packaged food industry in China appeared to be in good shape to post solid growth in 2023 until social unrest in November forced the Communist Party to abandon its strict COVID-19 controls.

Just Food quoted a Danone spokesperson as saying just before Christmas that “on consumption patterns, the current sanitary situation in China makes consumer trends quite unpredictable at the moment.” In spite of media reports that hospitals and cemeteries are overcrowded, China’s official data continue to show low infection rates and few deaths.

The fact that some observers think the economy might actually benefit from the relaxation of the strict restrictions on movement, despite the rise in infections that would follow, highlights this uncertainty.

The end of China’s “zero-COVID” policy, according to Chim Lee, a China/Asia analyst for the UK-based Economist Intelligence Unit (EIU), will likely have a mixed effect on packaged food sales, but will ultimately have a net-positive effect.

After a few months of initially surging infections, Dan Wang, the chief economist at Hang Seng Bank (China), forecasts that economic activity will begin to return to normal. The industries most affected by lockdowns—catering, tourism, entertainment, business travel, and events—will be among the first to revive,” Wang says, boosting packaged retail food sales.

In contrast to other retail categories, food sales were strong in 2022, according to Lee, because people stocked up on food in preparation for lockdowns and other restrictions on mobility. But Lee focuses on how the impact has varied across categories.

“Over the last few quarters, parts of the sector have been suffering from weak consumer sentiment as China’s economic outlook deteriorated under the “Zero COVID” policy, but China’s exit from Zero COVID will lead to a recovery in consumer confidence, which will likely benefit the sector eventually, although the short-term effect could be a little shaky as people stop hoarding packaged food,” Lee added.

GlobalData, the parent company of Just Food and a research and intelligence firm, is also upbeat, noting that in 2022, packaged food sales in China as a whole will surpass the US$1 trillion mark, with growth expected in 2023. Meat, dairy, soy, bakery, and cereals are anticipated to account for the majority of sales in 2023, contributing well over half of overall packaged food sales in China by value.

According to Bobby Verghese, a consumer analyst at GlobalData, “as consumers learn to live with COVID-19, economic and social activity will improve steadily in the second half of 2023.”

“The recall of the Zero COVID policy will unleash pent-up demand, igniting China’s consumption engine after nearly three years of financial and psychological stress due to the intermittent pandemic control measures.”

The upcoming celebrations of the Chinese New Year will serve as a barometer for consumer sentiment and business confidence.

Although some of the major names in China’s food and beverage industry experienced pressure on profits as a result of the pandemic, Hua Chuang Securities, based in Guiyang, which primarily provides bank investment, asset management, and securities brokerage, has noted in the Chinese-language stock analysis service Stockstar that their revenue has increased steadily.

Having said that, it went on to say that some of the sector’s practises have been rationalized. The brokerage, on the other hand, claimed that there is less pressure on the price of inputs like packaging materials, edible oil, and sugar going into 2023, giving packaged food companies more flexibility.

Stockstar cited a recent survey among several securities brokerages and discovered that in 2022, the net profits of 30 different food stocks traded on Chinese exchanges increased. Yanjin Shop Food of Guangxi, which primarily produces and sells snack foods containing nuts, tropical fruits, and marine products, was singled out for its year-over-year profit growth (up 102.3%).

Three other businesses were also highlighted by the service: Teway Food Group, based in Sichuan, primarily produces hot pot ingredients (for the domestic preparation of tabletop hot pot recipes), seasonings, and condiments; Shandong-based Delisi Food, which mainly processes and sells meat products; and Shanghai-based dairy-maker Milkground (each exceeding 70% year-on-year profit growth).

China’s packaged food industry still attracted investment in the last 12 months. Multinational cheese maker Bel snapped up 70% of Chinese cheese maker Shandong Junjun Cheese Co. Bubs Australia entered into a venture for infant-formula production in China. Major south-east Asian dairy group Vinamilk invested in its domestic production in part to help support exports to China.

However, some analysts believe China’s packaged food industry may be entering a period of consolidation as the country’s move away from Zero Covid could cause problems along the supply chain and upend consumer demand patterns. GlobalData research suggests that dealmaking in China decreased last year.

According to Ben Cavender, managing director at the Shanghai-based China Market Research Group, “there will be quite a bit of disruption to the supply chain with workers getting sick on production lines and last-mile delivery is having some major challenges at the moment.”

“In general, the overall situation should benefit the larger players, who tend to have better distribution and the ability to get products into home pantries, and who have better funding to weather a very fragmented consumer market over the next one to two quarters. There are many unanswered questions involving both the supply chain and consumers, so I think it’s currently very difficult to predict how things will pan out for the different market players.”